Donation-Based Crowdfunding Sites: Kickstarter Vs. Indiegogo

As a significant participant in the movement that helped create investment crowdfunding through JOBS Act legislation, and as the CEO of Crowdfunder, I've heard there's some confusion out there about what crowdfunding means these days, what the different crowdfunding sites do, and who they are for.

To clear up any confusion, here’s some simple information about two popular donation-based crowdfunding sites, and updates on the state of the new world of investment crowdfunding.

2 Types Of Crowdfunding: Donation Vs. Investing

Kickstarter and Indiegogo, considered the two most popular donation-based crowdfunding sites, were founded in 2009 and 2007 respectively. They give people and creative projects the opportunity to raise money via online donations or pre-purchasing of products or experiences.

To be clear, these two crowdfunding platforms only support donation-based projects. They don’t allow contributors to become an investor or a shareholder, and do not qualify contributors as accredited investors to participate in any financial returns. On both Kickstarter and Indiegogo, project creators retain 100% control over their products and services.

If you want a broader view of the entire crowdfunding landscape, see this recent Forbes piece listing the Top 10 Crowdfunding Sites and what each does best.

It wasn't until recently that the JOBS Act was enacted, giving backers the ability to invest online via investment crowdfunding. And while the Rulings for the JOBS Act are being implemented gradually, Title II of the JOBS Act has just passed a vote at the SEC which will allow companies to participate in general solicitation as of September 23rd this year, although only accredited investors will be able to invest.

Expect quite of bit of noise in the investment crowdfunding/accredited investing world as of September 23rd kickoff of Title II and the lift on the long time ban on general solicitation.

Sites like CircleUp, Crowdfunder.com, and AngelList are providing opportunities for investment crowdfunding (equity, convertible notes) and will likely participate in allowing select companies to generally solicit out on the web, with investment deals linked back to their accredited-investor-only investment environments online.

Donation-Based Crowdfunding On Kickstarter Vs. Indiegogo

Since its launch, Kickstarter has become one of the top players in the crowdfunding arena and has helped fund over 46,000 successful campaigns. Kickstarter credits their success on its strict qualification policy, project curating, and all-or-nothing funding policy.

Catering specifically toward creative, project-based campaigns, all projects submitted to Kickstarter must fit within one of the following categories: Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, or Theater. Only users from the United States, Canada, or the United Kingdom may create projects, though anyone may donate.

Campaigns for personal interests, charities, or "fund-my-life" projects are not allowed, and projects that do not meet Kickstarter's qualifications may be rejected.

So what campaigns work best on the Kickstarter platform? Any project that meets the above criteria and results in a specific product or service – such as projects that result in a new book, album, or independent film.

Some businesses have successfully used Kickstarter to fund expansion projects, develop new apps, and purchase new equipment. Successful projects set a reasonable goal, meet that goal within the first 30 to 40 days, and deliver all promised donation perks on time.

According to Kickstarter, only 10% of projects end having received no pledges, while "81% of projects that raised more than 20% of their goal were successfully funded." Projects may run for 60 days, though Kickstarter recommends setting a deadline for 30 days or less.

In terms of fees, Kickstarter applies a 5% fee for successfully funded projects, while failed projects incur no fees but are subject to an all-or-nothing policy- which is is exactly what it sounds like; if a project fails to meet its funding goal, none of the donation commitments made are actually processed. According to Kickstarter, this policy ensures a level of security for project creators and backers.

Meanwhile, Indiegogo has much looser guidelines. They essentially allow for the crowdfunding of anything – projects, trips, charities, and personal wishes. Unlike Kickstarter, Indiegogo does not curate campaigns or place restrictions on project creators. Anyone with an idea, a financial need, and a valid bank account may create a campaign. Indiegogo also offers more choices when it comes to raising funds by offering Fixed Funding and Flexible Funding campaigns.

On average, successful Indiegogo campaigns remain open for 47 days. According to statistics provided by a recent report published by The Verge, 80% of Indiegogo projects fail to raise more than 25% of the total goal. However, the site applies a 4% fee to the funds raised for successful projects, making it a slightly cheaper alternative to Kickstarter.

While the success rate of projects on Indiegogo may be daunting, many users choose Indiegogo for its choice of Fixed Funding or Flexible Funding options. Flexible Funding allows creators to keep the funds they have raised, for a 9% fee, even if the project is ultimately unsuccessful. However, creators are held accountable for delivering all promised donation perks.

Unsuccessful Fixed Funding campaigns are not charged any fees, creators are not required to fulfill any donation perks, and all contributions are returned. Although Indiegogo is coming in second to Kickstarter, its staying power, global audience, and inclusive policies have proven a great option for project creators searching for more flexibility.

Raising Investment Online Via Equity Crowdfunding

Now that the SEC has finally passed equity crowdfunding rulings, online investment is gaining massive momentum at sites like CircleUp, Crowdfunder.com and AngelList. The dynamics of investment crowdfunding share some similarities with the donation-model, but it’s a different game altogether.

Equity crowdfunding allows backers to reap eventual financial returns on investments, and the investment scale for businesses and startups is typically much larger than donation-based crowdfunding campaigns. The experience of funding something for $25 to $50 on impulse is radically different from considering the long-term prospects of a business, and investing $1,000 to $10,000, or more.

However, many of the same elements at play in successful donation-based crowdfunding campaigns apply to what helps drive investment crowdfunding as well. Those include:

Social Proof: Knowing who backs a campaign can help sway other potential investors

Momentum: Initial funding can beget more funding

Validation: Having raised money online successfully can be a proof point of its own

Customer Engagement: The people who fund you are also your customers

As the overall crowdfunding market is expected to grow roughly at a rate of doubling year over year, it is set to rapidly expand with the more immediate kicking off of Title II (general solicitation and accredited investing activity online).

Title III of the JOBS Act (non-accredited crowdfunding) is most likely to be proposed for commenting this Fall and put to a vote by the SEC Commissioners sometime at the end of the year or early 2014.

So stay tuned as the crowdfunding for donation and investment markets continue to expand rapidly.